Family business transitions represent one of the most complicated aspects of wealth management. They demand careful consideration of multiple factors, each with its unique challenges. At The Cecily Group, we help families successfully navigate this process. There are many widely known obstacles to family business transitions, such as resistance from an incumbent leader, unclear successor selection criteria, favoritism and unresolved tensions, and conflicting family and business priorities (Morris, Williams and Nel, 1996). This article will explore 8 often-overlooked issues to offer insights from both advisors’ and family members’ perspectives.
1. Psychological Ownership
Psychological ownership refers to individuals’ feeling a strong personal attachment to an entity, such as a business. When transitioning a family business, the question of psychological ownership is crucial. Who will feel ‘ownership’ of the business once it’s handed down? Will the next generation fully embrace their roles, or will they feel the itch to escape them?
Example: The Jones Corporation’s family business has been passed down generations. The patriarch, Mr. Johnson, has a strong emotional attachment and psychological ownership of the business. As he approaches retirement, he finds it difficult to let go and hand over control to the next generation. Despite the financial stability and readiness of his children to take on leadership roles, Mr. Johnson struggles with the psychological aspect of relinquishing control, leading to complexities in the transition process.
Potential Solution
Open dialogue and clear communication can ease these concerns. Encouraging open discussions about aspirations and concerns helps align the family’s vision for the business’s future. Also, providing the next generation with opportunities to make meaningful contributions to the business before the transition can cultivate a sense of ownership.
2. Professionalisation of Management
For many family businesses, there’s often a fine line between ‘family’ and ‘business.’ As the business transitions to the next generation, it might be beneficial to consider professionalising the management. This means bringing in external expertise or establishing formal roles and structures within the business.
Example: The Darrel Company has been a successful family business for decades. However, as the business grows, the family recognises the need for professional management to handle the complexities of scaling operations. They hire an experienced CEO from outside the family to lead the company. This decision creates tension between family members and the CEO, as the former are accustomed to having control, while the latter introduces fresh perspectives and professional expertise. Balancing the transition from a family-led management style to a more professionalised structure becomes a significant challenge.
Potential Solution
To begin, consider evaluating the skills and experiences within your family and comparing these to what the business needs to thrive. If gaps exist, external professionals who can provide objective advice and steer the company toward growth could fill these. Establishing clear roles and responsibilities can also help ensure accountability and improve business operations.
3. Family Governance
Family governance refers to the structures and processes families use to make decisions and resolve conflicts. It becomes increasingly important as the business transitions to the next generation, particularly when financial compensation is involved. Many family businesses operate informally, and their lack of governance structures makes succession management difficult. Research shows that clear governance structures (e.g., family councils, advisory boards) were beneficial in mitigating conflicts (Sandu and Nye, 2020).
Example:The Smith family business has expanded to multiple branches and generations. To ensure effective decision-making and family cohesion, the Smiths establish a family council composed of representatives from each branch. However, as the business grows, conflicts arise regarding the distribution of power and decision-making authority within the council. To manage these complexities, the family must develop a governance structure that balances each branch’s interests with the business’s long-term success.
Potential Solution
Effective family governance starts with a comprehensive family constitution or charter. This document outlines the family’s mission, values, and objectives, along with the roles and responsibilities of family members. Regular family meetings can provide a platform for open discussion and collective decision-making.
4. Differing Risk Profiles
Different family members may have varying risk profiles, and these differences can be exacerbated during business transitions. The sibling taking over the cash-strapped family business might face increased risk, which could lead to tension within the family. These differing risk profiles can lead to disagreements over investment decisions, expansion strategies, and even leadership styles.
Example: The Brown family runs a successful manufacturing business. The older generation, consisting of conservative-minded family members, has a risk-averse approach to business operations. However, the younger generation, with a more entrepreneurial mindset, sees opportunities for growth through innovative strategies and expansion into new markets. Balancing these differing risk profiles becomes a challenge during the transition, requiring careful communication and the development of risk management strategies that align with the overall business goals.
Potential Solution
Establishing clear financial strategies and contingency plans can mitigate risk and ensure all family members feel secure. It might be beneficial to seek advice from financial advisors or wealth management experts to navigate these complexities.
5. Legacy Building and Vision
What does the future hold for the family business? What’s the shared vision, and how does it tie into the family’s legacy? These are crucial questions to address during the business transition.
Example: The Thompson family has built a renowned luxury brand over several decades. As the senior members retire, the next generation faces the challenge of preserving the family’s legacy while adapting to evolving market trends. The family must articulate a shared vision that combines respect for tradition with the ability to innovate and stay relevant. Aligning family members’ aspirations and values with the evolving business landscape becomes crucial in ensuring a successful transition.
Potential Solution
Engage the family in conversations about their shared vision for the business. Develop a robust strategic plan that aligns with this vision and promotes the continuity of the family’s legacy. By engaging in structured discussions and creating a long-term strategy, families can ensure that their business remains relevant while respecting its roots.
6. Philanthropy
Many family businesses have a tradition of giving back to society. The transition process is an opportunity to reflect on this tradition and consider its future.
Example: The Gallard family business has amassed significant wealth over generations. As part of their family values, they are committed to philanthropy and social responsibility. However, during the transition, the younger generation expresses different charitable interests and preferences for strategic giving. Balancing these philanthropic goals while maintaining family unity and using resources effectively is a challenge for the Garcia family.
Potential Solution
Family members can work together to define their philanthropic goals and align them with the family’s values and the business’s resources. Setting up a family foundation could be one way to institutionalise these efforts.
7. Valuation and Compensation
Valuation of the family business is a sensitive issue, particularly when it involves compensating siblings who are not taking over the business. It’s essential to find a fair method that also preserves the financial health of the business.
Example: The Roberts family business is preparing for the next generation. The challenge arises when determining the fair valuation of the business and establishing a compensation plan for family members involved in the business. Conflicts may emerge when balancing the desire to reward family members adequately while maintaining the financial stability and growth of the business. Implementing transparent and objective valuation methods and compensation structures becomes essential to navigate these complexities.
Potential Solution
Fairness does not always mean equal distribution—some family members may contribute more actively to the business, requiring a different compensation approach. Seek the help of an unbiased third party to conduct a comprehensive business valuation. They can consider both tangible and intangible assets, such as intellectual property, to arrive at a fair value. Consider the future cash flows of the business when planning compensations to ensure the business isn’t drained of necessary resources.
8. Safeguards Against Self-Dealing
Self-dealing, where a person in a position of responsibility puts their interests above those they represent, is a significant concern during business transitions. It’s essential to set safeguards to prevent these so-called agency issues.
A Real-life Example: The Ford Motor Company. Henry Ford’s grandson, Henry Ford II, took over after his grandfather’s death. However, the transition was not smooth due to conflicts over control and differing visions for the company. It was only through professionalising management, setting up clear governance structures, and balancing the needs and aspirations of family members that the company could navigate this challenging transition.
Potential Solution
Develop clear rules and procedures within your family governance structure to prevent self-dealing. This could include specific conflict-of-interest policies and decision-making protocols. Research shows that successors who gained external work experience before joining the family business found it easier to earn employees’ respect (Sandu & Nye, 2020). Such external experiences can also facilitate professionalisation and innovation within the company.
Conclusion: The Comprehensive Transition Plan
While every family business transition is unique, the challenges discussed here are widely relevant. Addressing them early helps protect both the business and the family’s legacy for future generations. Successful transitions don’t happen by chance—they require foresight, structured planning, and open dialogue.
If you’re looking to create a resilient and well-structured transition plan, The Cecily Group is here to help. As specialists in intergenerational wealth transfer, we support families in building processes and mental models that strengthen continuity. We empower your family to carry forward its vision within the family council.
Start early, review often, and stay adaptable—because a well-prepared transition is the foundation of lasting success.
References:
Morris, Michael & Williams, Roy & Nel, Deon. (1996). Factors influencing family business succession. International Journal of Entrepreneurial Behaviour & Research. 2. 68-81. 10.1108/13552559610153261.
Sandu, Petru & Nye, Natalie. (2020). Succession Challenges in Family Businesses from the First to the Second Generation. JOURNAL OF SMALL BUSINESS AND ENTREPRENEURSHIP DEVELOPMENT. 8. 10.15640/jsbed.v8n1a5.
